DOL to Rescind Obama-Era Tip-Pooling Restrictions

The U.S. Department of Labor is on the verge of handing restaurants a major victory. The DOL plans to propose a full rescission of the controversial tip-pooling restrictions put into effect by the Obama administration in 2011.

The restrictions identified tips as the property of employees, making it so any money collected could not be distributed to other workers or given back to the business. This was true even for employers who decided not to take tip credits and pay employees minimum wage.

For some background, The Fair Labor Standards Act established that employers could pay tipped employees a reduced hourly rate of $2.13 per hour as long as their tips cut the difference to the federal minimum wage rate of $7.25. Employers had to pay the difference in case it came up short. Meanwhile, employees get to keep any excess money from tipping.

Naturally, this was a widely used practice in restaurants, where employers pay servers and other employees well below minimum wage and let this “tip credit” fill the gap.

But in many cases, this leaves too much white space between front- and back-of-house employees. One answer: tip pooling. Restaurants avoid taking the “tip credit” and distribute tips evenly across staff.

Here was the statement from the DOL:

“Section 3[m] of the FLSA, 29 U.S.C. 203[m], provides in part that an employer may take a partial credit [tip credit] against its minimum wage payment obligation to a tipped employee based on tips received and retained by the employee. The Department’s regulations limit an employer’s ability to use an employee’s tips regardless of whether the employer takes a tip credit under Section 3[m] or instead pays the full FLSA minimum wage directly to the employee. In this Notice of Proposed Rulemaking, the Department will propose to rescind the current restrictions on tip pooling by employers that pay tipped employees the full minimum wage directly.”

The announcement does not immediately change existing law, and employers would be wise to stay tuned in the coming months. It does, however, set change in motion.

This news will be greeted warmly by many in the restaurant industry, but especially by those in the Ninth Circuit, which covers California, Nevada, Oregon, Washington, Arizona, Alaska, Idaho, Montana, and Hawaii. In 2016, the Ninth Circuit Court of Appeals reversed federal district court orders invalidating 2011 revisions to the DOL’s tip-pool regulation, essentially reviving the tip-pooling restrictions. Employers were no longer allowed to mandate tip-pool distribution, despite if a tip-credit existed or not.

Perhaps spearheading the change was a Tenth Circuit ruling in June that said the tip-credit provision does not apply when employers pay at least the $7.25 minimum. In that case, the employer could retain the tips. Clearly, this ruling conflicted with the aforementioned Ninth Circuit one.

Employers in the Tenth Circuit (Kansas, Oklahoma, Utah, Wyoming, Colorado and New Mexico) and the Fourth Circuit (Maryland, West Virginia, North Carolina, Virginia, and South Carolina), as well as the Eleventh (Florida, Georgia, and Alabama) that do not use the tip credit can continue to decide how to distribute tips, although state and local laws could apply, in the wake of the DOL’s announcement.

Outside of those circuits, however, restaurants are still prohibited from tip pooling for the time being.

Deciding whether or not the DOL can even make such regulations is an issue that could make its way to the Supreme Court in time.